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Shorting Tencent with a long view on Alibaba returns the wily trader 29 per cent, on track for the best annual return in five years

  • Investors who short Tencent while taking a long position in Alibaba could have made as much as 29 per cent this year excluding dividends and execution costs
  • The pair trade is set for its best annual return in five years, according to Bloomberg analytics

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A trader on the floor of the New York Stock Exchange (NYSE) on Wednesday, December 19, 2018. Photo: Bloomberg

Betting on the gulf in performance between shares of two Chinese internet giants has been a slam-dunk trade this year – and it may have further to run.

Investors who have adopted a pair trade strategy to short Tencent Holdings while taking a long position in Alibaba Group Holding could have made as much as 29 per cent this year excluding dividends and execution costs, with the trade set for its best annual return in five years.

The tactic turned more profitable in October, after Hong Kong-listed Tencent slumped to a nine-month low following a series of block trades. On Tuesday the stock slumped as much as 1.6 per cent.

“In the long-term, the trend is probably going to continue,” said Castor Pang, head of research at Core Pacific-Yamaichi International (HK) Ltd. in Hong Kong. “A period of fast mobile-game growth in China seems to be over, and restrictions on mobile games by the government aren’t helping Tencent.”

On the other hand, Alibaba is focused on China’s online consumption, which remains strong, Pang said. Its shares rose 2.5 per cent on Monday.

A pair trade strategy typically involves taking two correlated securities, shorting one and going long on the other. The bigger the gap between performance, the more profitable the trade usually becomes. While Alibaba is up around 30 per cent year-to-date in the US, Tencent has pared its gain to around 1 per cent, having lost around US$93 billion in market value since April.
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